The combination of Israel's recent tax reform legislation and stronger IRS enforcement of the US tax code has encouraged American citizens living outside the US to renounce their US citizenship and settle in Israel as an ultimate tax haven. The choice of permanent residence in Israel is in fact part of a larger trend of Americans emigrating to other countries in an effort to escape America’s controversial worldwide inflexible and unforgiving income tax policies.
The US is one of the few countries in the world that imposes taxes on the world-wide income of its citizens and permanent residents, regardless of whether they live in the country or abroad. Moreover, the complex US tax system makes it difficult for people to fully understand their tax liabilities, including the sanctions that ensue if errors are made. Even worse, criminal penalties may apply and people may be arrested when they returns to the US.
The economic fluctuations and declining tax revenues that accompanied the sub-prime crisis encouraged the US Internal Revenue Service (IRS) to take steps to address more rigorously the tax liabilities of US citizens living abroad. IRS actions included enacting a series of treaties with countries that are known to be tax havens, and completing an agreement with a group of Swiss banks compelling them to help identify US tax evaders. In even more sweeping action, the US government negotiated a very broad agreement, in effect from 2013, requiring most banks in the world, including every bank in Israel, to report to the IRS every account held or opened by an American citizen.
The desire to escape these draconian measures is complemented by a recent amendment to the US expatriation regulations which made it more attractive for American citizens to renounce their citizenship. The amendment declared that the IRS could no longer pursue former citizens in order to collect taxes on non-US sourced income. This means that once a US citizen renounces his citizenship and emigrates, all of his future income from non-U.S. sources ceases to be subject to US taxes. Furthermore, assets held outside the US become immune to US estate taxation.
In 2008, Amendment 168 of the Israeli tax code embraced broad tax reform granting generous tax benefits for people who become Israeli residents for the first time or who are considered to be senior returning residents. The amendment is part of a much broader program aimed at encouraging new immigration, bringing back past emigrants to reside in Israel permanently, and encouraging investment in Israel.
While new immigrants to Israel have long enjoyed tax benefits, for the first time, the amendment gives comparable benefits to senior returning residents:
- Exemption from tax on income earned abroad for a 10-year period;
- Exemption from capital gains tax on an asset sold outside of Israel;
- Exemption from income taxes on profits of a foreign company managed and controlled by a new immigrant;
- An "adaptation year" in which senior returning residents can enjoy full income tax exemption on income earned abroad and exemption from tax liabilities that apply only to Israeli residents;
- Exemption from income taxes on interest on a foreign currency bank deposit in Israel.
In sum, more and more US citizens are choosing to cross the Rubicon, and are renouncing their US citizenship and immigrating to Israel to legally evade the IRS enforcement measures and enjoy the significant tax benefits offered by the new Israeli tax reform. The worthwhileness of such a step is of course a matter of personal circumstances, financial background and aspirations. But although it is not clear how widespread this phenomenon is, and what relative importance US citizens who immigrate to Israel place on this aspect among the array of considerations that they take into account in deciding to immigrate to Israel, tax residency is certainly a factor.
For obvious reasons, accurate statistics are not available, but it is estimated that thousands of US citizens have already taken this step.
The writers are attorneys at Israeli law firm Doron, Tikotzky, Cederboum.
Published by Globes [online], Israel business news - www.globes-online.com - on December 17, 2013
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